Final answer:
The Fed controls inflation by adjusting the federal funds rate. It increases rates to curb inflation, as seen historically in the 1990s and early 2000s, and employs quantitative easing during economic downturns to encourage lending and spending.
Step-by-step explanation:
Current Measures by the Fed to Fight Inflation
The Federal Reserve (Fed) plays a crucial role in managing economic stability and controlling the rate of inflation. To combat inflationary pressures, the Fed has historically used its ability to adjust the federal funds rate, which is the interest rate at which banks lend to each other overnight. For instance, between 1993 and 1995, the Fed responded to a risk of rising inflation by increasing the federal funds rate from 3% to 5.8%, which fortunately did not deter the economic growth of the 1990s. Similarly, in 1999 and 2000, as inflation seemed to rise, the Fed raised the rate from 4.6% to 6.5%.
In response to different economic challenges like the threat of deflation or to stimulate growth, the Fed has also been known to lower the federal funds rate, as it did from 2007 into 2008, targeting a rate between 0% and 0.25%. Furthermore, during economic uncertainty, the Fed has employed quantitative easing, a strategy aimed at convincing the public and the markets that interest rates will stay low to avoid deflation and encourage lending by providing banks with ample liquidity.
Ultimately, historical patterns reveal that the Fed is committed to not allowing high inflation rates, such as those experienced in the 1970s, and it has tightened its inflation rate objectives over time, aiming to keep it below 2%. The specific measures the Fed currently takes to increase interest rates in fighting rising inflation would follow similar patterns of adjusting the federal funds rate to curb spending and investment, thereby slowing the inflation rate.